Q05 – Long Quiz AFAR

2
Name: October 14, 2019

1. On January 1, 2020, Ward Company issued 9% bonds with face amount of P4,000,000, which
mature on January 1, 2030. The bonds were issued for P3,756,000 to yield 10%, resulting in
bond discount of P244,000. The entity used the interest method of amortizing bond discount.
Interest payable annually on December 31.

A. On December 31, 2020, what is the balance of the discount on bonds payable?
a. 228,400
b. 208,000
c. 206,440
d. 204,000

B. What is the carrying amount of bonds payable on December 31, 2020?

a. 3,756,000
b. 4,000,000
c. 3,771,600
d. 3,740,400

2. At the beginning of current year, Fence Company issued 12%, P5,000,000 nonconvertible
bonds at 103 which are due in 5 years. In addition, each P1,000 bond was issued 30 share

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warrants, each of which entitled the bondholder to purchase for P50 one share of Fence
Company, par value P25. Interest is payable annually every end of the year.

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On the date of issuance, the market value of the share was P40 and the market value of the

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warrant was P4. The market rate of interest for similar bonds ex-warrants is 14%. Use two
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decimals in rounding off values.
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A. What amount should be recognized as discount or premium on the original issuance of the
bonds?
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a. 342,000 premium
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b. 342,000 discount
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c. 450,000 premium
d. 450,000 discount
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B. What is the equity component arising from the issuance of bonds payable?
a. 150,000
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b. 450,000
c. 492,000
d. 0
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3. Moriones Company issued P5,000 face amount 12%, 5-year convertible bonds at 110 at the
beginning of current year, paying interest semiannually on January 1 and July 1. It is
estimated that the bonds would sell only at 103 without the conversion feature. Each P1,000
bonds i convertible into 10 ordinary shares with P100 par value. What is the increase in
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shareholder’s equity arising from the original issuance of the convertible bonds?
a. 350,000
b. 500,000
c. 150,000
d. 0

4. Due to adverse economic circumstances and poor management, Real Company had
negotiated a restructuring of a 9% P6,000,00 note payable to MANI Bank due on January 1,
2020. There was no accrued interest on the note on January 1, 2020. The bank reduced the
principal obligation from P6,000,000 to P5,000,000 and extended the maturity to three years
on December 31, 2022. However, the new interest rate is 13% payable annually every
December 31.

A. What is the gain on modification of debt to be recognized for 2020?

a. was
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b. 350,000
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 Q05 – Long Quiz AFAR
2
Name: October 14, 2019
c. 505,500
d. 0

B. What is the interest expense for 2020 as a result of the modification?

a. 650,000
b. 450,000
c. 494,505
d. 540,000

5. At the beginning of the current year, Southstar Company leased a building with the following
information:

Annual fixed payment in advance at the beginning of each lease year 1,000,000
Initial direct cost paid 350,000
Lease incentive received 150,000
Lease bonus paid to lessor before commencement lease 100,000
Discounted amount of restoring the building as required by contract 200,000

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Purchase option that is not reasonably certain to be exercised 300,000

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Lease term 5 years

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Useful life of building eH w 8 years
Implicit interest rate 8%

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Use two decimals in rounding off values.
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A. What is the initial lease liability?

a. 4,514,000
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b. 4,310,000
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c. 4,614,000
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d. 4,764,000

B. What is the cost of right of use asset?

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a. 4,814,000
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b. 4,810,000
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c. 4,614,000
d. 4,764,000

C. What is the annual depreciation?

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a. 912,800
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b. 588,750
c. 962,000
d. 601,250
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D. What is the interest expense for the current year?

a. 344,800
b. 205,984
c. 264,800
d. 0

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